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The debt monster

The national debt has gone from 36% of the economy to 72% between 2007 and 2012. It has doubled in proportion to the economy in five years. That was largely due to the Bush Wars and the Obama Stimulus, but also due to our recurring deficit of hundreds of billions of dollars. Currently the interest on the debt is about $400 billion per year. But what if interest rates go up?

The current interest rate paid on the debt is only about an average of 2.5%. So on our national debt of $16 trillion, we pay $16,000,000,000,000 x 0.025 = $400,000,000,000. But what if the interest rate was suddenly 5 percent instead? Then the annual interest payment goes up to $800 billion. That’s a huge increase. And since that money gets added onto the national debt, the next year the payments will be even higher.

A sudden increase in interest payments of $400 billion is equivalent to suddenly deciding to cut all discretionary spending. $400 billion is about as much as the money earned by the recent tax increases on the wealthy, so it would cancel that.

And 5% is just a number I picked. Interest rates could actually go up much more. Historically, bonds rates have got as high as 13% as recently as 1980. And with nervousness running high about the current world-wide debt crisis, there’s no reason US bond rates can’t go back up to that level. A 13% bond would mean a $2.08 trillion interest payment.

That’s right, the interest payment would be over 5 times what it is now, and would overwhelm the federal budget. It would mean we would have to raise taxes by 20% or more on every family, or cut spending by 20% or more, or literally go broke.

We are at the point where a very realistic fluctuation in the bond market could destroy our country. That’s the level of crisis we are at, but we have failed to act.

The recent “fiscal cliff” would have raised taxes and cut spending enough to balance the budget within a couple of years. But it was treated as the worst thing that could happen to the United States economy since the Great Depression. And when the economy was good and the budget was balanced in 2001, instead of using the surplus to pay down the debt, we used it to cut taxes (the Bush Tax Cuts). Judging by these past actions, it’s doubtful we will ever be able to balance the budget, let alone pay off the debt.

So is our country doomed? I hope not, but I have no idea what’s going to happen that can save it.

By the way, if I had called the post “The bond rate crisis” you might skip it, right?